Yes, and yes -
I wouldn't go so far as to say the default Dreamlands writing is simply a "dungeon crawl", but with Dunsany's original Dreamlands stories being an influence on Lovecraft, Tolkien, C.S. Lewis, Edgar Rice Burroughs, the majority of other fantasy writers, and the guys who created D&D, it's sometimes easy to dismiss or just let the setting default to a "generic" fantasy kind or thing, when the Dreamlands can be used for so much more than that.
And I definitely agree that the absurd and weird horror can work very well together. I think the boundary between horror and humor is a thin one, that a lot of Lovecraft's stories are structured similarly to jokes (complete with "punchlines" in many cases - the various episodes of "Herbert West: Re-Animator" are a more obvious example, but the more serious "The Statement of Randolph Carter" is another example), and that the only thing that really separates humor from horror is a question of mood, and the seriousness with which the absurd element gets treated. (If you've never read it before, the Stephen King story "The Moving Finger" is IMHO a great example of something that should be ridiculous working as horror, and one of those rare situations where Stephen King's brand of horror really worked for me....)
Personally, I am a huge fan of Stephen King, and yes, the Dreamlands has the potential to be so much more. But the Dreamlands Sourcebook never expanded upon these ideas and the core tenants of the Lovecraftian Horror was almost completely ignored and hand-waved away. Of the dreamland-adventures that came with the book, only two or three of them really worked. And even then with a lot of modifications on my part to bring out more horror.
Personally, I disliked stories like 'Herbet West: Re-Animator', these stories was too tainted with his racism and overall awfulness as a human being for me to enjoy impartially. There are many things that I find myself disagreeing with when reading his works. He often characterised the country folks as back-wards, inbred, and poorly-educated. Please don't me started on his views on race and foreign immigration. You're welcome to have your own views, and I am a fan of his horrors and creations; it's his personality and views on class and race that I truly have a problem with.
Yes, I LOVE absurd horror. I have often modified many areas of the Dreamlands to make it into my own brand of absurd horror. The Magic Forest the investigators found themselves in during an intrepid adventure in the Dreamlands was modified by to be dense and foggy, as well as being populated by Horrors Nameless. The trees secret a gooey, honey-like liquid that tastes SO AWFUL that any attempt to eat or digest it will cost 1 HP, and will take 1D20 hours for the Dream-body to process.
The entire intro adventure ended up with the PCs hugging a tall tree with the eyes closed, waiting for the Horrors Nameless below them to pass away. I believe that the only way to do Wickedly Absurd Horror is to make the Investigators confused about everything, so that they could interact with the world using only limited information that make things either more or less intimidating.